I'm trying to get the economics of this down for a written piece.Ive got a few problems though:

What is the Incentive of being a good node?What is the dis-incentive of being a bad node?

For example at a marketplace, people build up a reputation, and wouldn't want to damage it by selling bad goods.An untrusted seller at a market place will be met with low sales. Thus there exists an incentive to selling good goods.

With bitcoin, say Im deciding whether to be a good node or a bad node. Is it not true that im impartial? Wont I get paid either way, as long as I solve the block?

Now I know that in most systems (and definitely bitcoin) that there are much more good nodes then bad nodes. But what is the rationality behind it from an individual level?

I think by "node" you actually mean "miner". "Nodes" are part of the P2P transaction relay network. "Miners" are the ones solving blocks.

Nodes don't have any designed-in incentives. They can't relay bad information (the next node just drops it). The only evil thing they can do is refuse to relay information for some reason such as DOSing the network, trying to split the network or trying to promote double-spends. This is basically useless to try since the network is so efficient at propagating valid transactions.

Miners work to earn the generated coins and transaction fees. They have a strong incentive to be a "good" miner (properly including transactions) because if they don't future miners will not continue the chain based on their block. Instead they will fork the blockchain from before where you did something bad and continue building from there. Since your bad block gets excluded, you lose your generated coins and fees and don't gain anything.

The only time it becomes feasible to do something "bad" as a miner is if you control more than half of the hashpower on the network. Then you can create double-spends and DOS the network.

War is God's way of teaching Americans geography. --Ambrose BierceBitcoin is the Devil's way of teaching geeks economics. --Revalin 165YUuQUWhBz3d27iXKxRiazQnjEtJNG9g

As revalin points out you use the word node but the rest of post indicates you mean miner.

Minority Miners have no incentive to disrupt the network. Creating invalid blocks, blocks with invalid transactions, or blocks with double spends serves no purpose. The rest of network will discard it and build on last good block. "Bad miner" does all the work and gets no profit.

If a miner has the majority of hashpower they "COULD" disrupt the network via double spends or transaction witholding but there is no proven economic value. Gaining and maintaining 51% of network hashing power is prohibitively expensive and there simply isn't sufficient economic value to the attack. It would be like spending $80,000 to rob a 7-11 and getting $180 in revenue.

The greatest threat would be a majority (51% of hashing power) miner interested in a non-economic attack. An entity interested in the destruction of Bitcoin isn't looking for a direct profit from double spends and is instead looking at the mining as the "cost" of the attack. The Bitcoin model makes economic attacks unlikely but can't provide a disincentive (beyond high cost) for non-economic attacks.

If a miner breaks the rules then other miners won't build off of their block (because they are worried (rightly) that other miners won't build off of their block) you don't actually get paid until your block is 120 blocks deep.

Mining a block without including tx isn't really 'bad' but you can do that and all you miss out on is any tx fees you could have gotten.

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